A Rating Agency for Rate Cases

The energy industry is fueled by debt. Long-lived assets require low-interest, long-lived financing to keep energy affordable and available to all. Securing low-interest debt means investors and decision-makers need to have confidence that the right infrastructure is getting built for a particular community. Accelerating the electrification and decarbonization transition while keeping it affordable and politically tenable means we need an ESG scoring system that investors and regulators trust.

Summary

An enterprise software platform that provides a rating for energy infrastructure proposals put forth by utilities, developers, and other stakeholders (akin to how Moodys or S&P are paid to rate corporate bonds). The platform enables collaboration between stakeholders in order to accelerate the pace of capital deployment on the grid, secures efficient financing (e.g. green bonds), and enhances investor returns (through reduced risk/lower interest rates, increased probability of regulatory approval, and higher allowed ROEs from regulators). Data ingested by the platform will be used to 1) provide insight to equity and debt investors, 2) enable new financial solutions for distributed infrastructure (such as hybrid financing), and 3) solicit competitive bids from vendors. The long-term strategy would be to create a transparent digitized rate case process that could be used to aggregate regulated utilities under a mega ESG YieldCo, maximizing capital efficiency for regulators and growth for investors.

Problem

The most influential platform for expediting energy infrastructure investment, the utility rate case, is increasingly slowed by the growing complexity of economic, social, and technological choices (e.g. EVs, rooftop solar, smart homes, batteries, etc.). This complexity combined with increasing political pressure to decarbonize while maintaining affordability and increasing system resilience is leading to mistrust between regulators, utilities, and other stakeholders (states, cities, consumer advocacy groups, investors, unions, project developers, etc.). As long as this mistrust dominates, infrastructure and decarbonization investment will remain gridlocked. Regulators lack the tools necessary to turn complex proposals into simple and trustworthy evaluations.

Additionally, identifying the best infrastructure and policy options is a very local question (i.e. it is influenced by the building inventory, grid topography and health, demographics, local history, weather, incumbent infrastructure, incumbent financial positions of institutions, and many other factors). Decision-makers are unable to build consensus on long-term investment plans for their local communities.

Combating climate change will require a tripling of the velocity of capital investment in grid infrastructure to support new clean power plants and electrified buildings and cars. In 2019, new capital spent on electric transmission and distribution infrastructure by major U.S. utilities amounted to $55 billion ($33 B just in the low voltage distribution system). Across the globe, all of this investment must pass through a utility rate case for approval, and regulators must have confidence in its prudency to give approval before burdening ratepayers. Addressing climate change on any relevant timescale to avoid its worse effects requires a new approach to rate cases.

Solution Vision

Build a rating agency that scores utility rate cases, infrastructure proposals, and legislative proposals (the same way Moody’s or S&P charge corporations to rate newly issued bonds). Start by using public data and historical records to build an automated ratings system based on economics, reliability, social equity, and consumer affordability. As regulators become dependent and encourage their utilities to buy-in, incorporate proprietary utility data to improve the ratings system. Eventually, offer a SaaS product that allows utilities and other stakeholders to develop their rate cases in our platform, collaborate with key stakeholders, and receive real-time feedback, thus digitalizing the utility rate case process.

As the data pool grows and more utilities are subscribed on the platform, additional financial services can be added:

• Green, social, and/or climate bond issuance to enable new sources of financing
• Hybrid financing to resolve the split incentive problem and enable the lowest cost for each stakeholder (e.g. energy efficiency upgrades that are partially rate-based and partially PACE financed)
• ESG metrics for investors
• Granular carbon tracing of corporations and institutions
• Forecasting on rate case outcomes for debt/equity investors
• Insight and comparisons into regulatory performance of each utility
• Insight into investment landscape in each utility region (where are there still opportunities for electrification and rate base growth)

Additional utility tools:

• Ranked infrastructure investment opportunities so that utilities know which projects to target first for maximum kWh increase, rate base increase, or carbon reduction, etc.
• Collaboration tools with regulators, cities, unions, consumer advocates, local communities
• Bidding platform to automate RFPs for vendors

End Game: Form a separate YieldCo holding company of aggregated pure-play regulated utilities that are optimized to transparently build their rate cases from the digital rate case tool. Use the data platform to acquire utilities, streamline their regulatory agendas, and conduct all rate cases in an open data-driven environment. Adjust data platform pricing to capture a % of rate base savings. Standardize data protocols and incentive structures across utility regions. YieldCo would be a publicly traded limited partnership subsidiary of the main corporation.

Business Model:

Pricing:

If utility/developer/proposing entity is not subscribed to the platform:

• A rating fee to score a particular proposal based on # of customers served, # miles of distribution, or MWs served

If utility/developer/proposing entity is subscribed to the platform:

• Annual subscription based on # of customers served or miles of T&D

Potential Customers and associated value add:

Publicly Traded Utilities

• Increased allowed debt-to-equity ratio
• Lower interest on debt
• Increased allowed ROE
• Increased PUC approval probability
• Improved stakeholder buy-in
• Granular allocation of costs on customers (reduced unnecessary or regressive cross-subsidization)
• Expedited rate base growth (revenue growth) for utilities
• Faster acquisitions M&A between regulated utilities

Co-ops

• Planning and investment transparency
• Enable financing under new mechanisms: green bonds, climate bonds, social impact bonds

Municipalities

• Planning and investment transparency
• Enable financing under new mechanisms: green bonds, climate bonds, social impact bonds
• Expedited timeline for decarbonization for cities, states, and customers

Developers

• Reduced interest rate on debt?
• More efficient financing for distributed infrastructure (rooftop solar, batteries, EVs, DR, DERs, microgrids, NWAs, etc.)

Institutional Equity investors

• Improved ROE and dividends
• Environmental and social performance scoring
• Optimal utility regions for growth/improvement

Municipal bond purchasers

• Confidence on ESG metrics/qualification
• Special purpose bonds tied to specific projects and ESG outcomes

Corporate bond purchasers

• Special purpose bonds tied to specific projects and ESG outcomes

Private Equity investing in infrastructure

• Deal sourcing
• Lower interest on debt
• Increased leverage

Insurance Companies

• Enable new or improve upon existing insurance products (insurance against political or regulatory risk)
• Improve risk quantification on existing insurance products

Auditors

• Carbon tracking

Utility Regulators

• Ensure prudency through greater accountability and measurement
• Higher confidence for all parties on prudent costs for decarbonization
• Reduced political scrutiny
• Simpler decision making
• Expedited timeline for decarbonization for cities, states, and customers

Building owners

• Lower-cost or rate-based financing
• Democratized tax equity?

Society at Large

• Faster decarbonization at a lower cost
• Greater confidence in public infrastructure decisions
• Reduced O&M costs through economies of scale when utilities are bundled under a single YieldCo
• Resolve split-incentive problem plaguing DER investments (enabling investment that would not otherwise occur)

Bold Strategies for Moving the Needle Quickly:

• Issue or underwrite ESG bonds directly to demonstrate new financing options for qualifying infrastructure
• Proactively fund investment opportunities and then try to recover capital through green bonds, rate base, or PE funds (alternatively, raise a separate fund or partner with a PE firm)
• Crowd-source customer data by offering a home upgrade lottery or simply pay customers for data in the form of energy upgrades and then work to recover the investment through green bonds, etc.
• Purchase the smallest utility possible and use the data platform to plan and conduct rate cases

Jake Jurewicz offers professional consulting at 1st Principles Consulting, LLC.